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Drop-shippers are charging sales tax on shipments into states where they have nexus and say resale certificates are required in order to stop doing so. Is that correct?

Full Question: Client drop-shippers are charging client sales tax on shipments into state where THEY have NEXUS. Client invoices the customer and does not charge sales tax as client do not have NEXUS in the customer state. If client shipped directly to the customer, no sales tax would be due. Drop-shipper is requesting resale certificates for the states that they are charging client sales tax to stop doing so. If the client were to start charging sales tax on their invoices to the customers, we believe that they will shop another company to avoid paying the sales tax. The resale certificates require that we hold valid registrations in those states and of course, we do not. If we register in those states, does the client obligate itself to sales tax and income tax filings in those states? Do the state revenue depts. tie the registrations to the income tax side?

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Answer:

Diane Yetter photoBased on your question you specifically asked for the rules for these state: California, Mass, Louisiana, Maryland so we have included the rules for these states only. The drop shipment rules vary by state and must be evaluated individually. The supplier is correct in that they need to collect tax or valid exemption documentation for the states where they have nexus. Many states do accept alternative documentation when a supplier is drop shipping goods to an end consumer of their customer. Of the states in question CA, MA and MD all require a reseller who is claiming a resale exemption to be registered in their state. Therefore, the only way for your client to issue a valid resale exemption certificate in these 3 states is to register to collect sales tax. They will then be able to issue a resale certificate but they will also be required to collect sales tax on all sales to customers in these states. In LA, there is a different rule depending on whether the inventory ships from within LA or not. If the inventory ships from within LA to the end consumer in LA, then the only way to issue a resale certificate is to be registered in LA. If the inventory ships from outside of LA, then they can issue a letter to their supplier stating that they are not required to be registered in LA. In terms of what other obligations will registering for sales tax raise, the client should not have an income tax liability unless that meet the nexus thresholds for income tax. If they definitely do not have any nexus or presence then it is not likely they will be required to file income tax returns. However, this should be reviewed with their income tax advisor. States are getting more aggressive in identifying any potential unregistered taxpayer. One way is to compare registrations between not only sales tax and income tax but all other taxes and state licenses and registrations. Therefore it is imperative that a company does a comprehensive review of its activities prior to registering for any taxes. This includes related entities.

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